General Notice, Notice 529 of 2007 - gov · Market reviews are a consultative process in which...

STAATSKOERANT, 3 MEl 2007

GENERAL NOTICE

NOTICE 529 OF 2007

NO.29863 3

INDEPENDENT COMMUNICATIONS AUTHORITY OF SOUTH AFRICA

NOTICE OF INTENTION TO DEFINE RELEVENT END TO END LEASED LINESAND OTHER WHOLESALE MARKETS IN TERMS OF SECTION 67(4) OF THEELECTRONIC COMMUNICATIONS ACT 36 OF 2005.

1. The Independent Communications Authority of South Africa ("the Authority"/"ICASA") hereby gives notice and invites written comments in terms of section48 of the Independent Communications Act of South Africa Act 13 of 2000, asamended, ("ICASA Acf') on the definition of various wholesale and retailmarkets attached in annexure A below.

2. Interested persons or organisations are hereby invited to submit writtenrepresentations or documentation, including an electronic version in MicrosoftWord, on their views in accordance with the provisions of section 48 inquiry byno later than 8 June 2007.

3. Persons or organisations who wish to make any representation or submit anyrelevant documents must also indicate whether they would like an opportunityto make oral presentation at a hearing, which must not exceed one (1) hour induration.

4. Written representations or documentation may be posted or hand delivered,for the attention of:

4 No. 29863 GOVERNMENT GAZETTE, 3 MAY 2007

Mr. David RailoManager: Policy ResearchPrivate Bag X 10002 orSandton,2146

Block A, Pinmill Farm164 Katherine StreetSandton, 2146

Where possible, written representations should also be e-mailed [email protected] and to [email protected]

5. All written representations or documentation submitted to the Authoritypursuant to this notice shall be made available for inspection by interestedpersons at the ICASA library and copies of such representations anddocuments can be obtained upon payment of the prescribed fee.

6. Interested persons or organisations who submit written representations ordocumentation should indicate, upon submission, whether there is any partthereof which should be treated as confidential. The request and reasons whyany part of the representation or documentation be treated as confidentialmust be submitted at the same time with the written representation.

7. ICASA will consider whether to grant or refuse the request for confidentiality inaccordance with the provisions of the ICASA Amendment Act. Where theAuthority refuses to treat any part of the representation or documentation asconfidential, the person or organisation making such representation may

- withdraw the representation or documentation in question and the Authoritywill not take it into consideration when making its findings.

8. In order to provide for a wider basis of representations to be made anddocuments to be submitted during the inquiry, the Authority has compiledquestions pertinent to this issue.

These questions have been incorporated into the annexure hereto entitled"Market definition of end to end leased lines and other wholesaleservices"

9. The findings and conclusions or recommendations made by the Authorityfollowing the enquiry will be published in a Government Gazette as providedfor by section 4C of the ICASA Act.

PARIS MASHILECHAIRPERSON

STAATSKOERANT. 3 MEl 2007

ANNEXURE A: MARKET DEfiNITION OF END TO END

LEASED LINES AND OTHER WHOLESALE SERVICES

1. INTRODUCTION

No.29863 5

1.1 The Electronic Communications Act ("ECA") mandates ICASA to engage inmarket reviews in which a) markets are defined, b) Significant Market Power("SMP") is identified, c) market competitiveness is evaluated and d) regulationswhich may be imposed are set out' (S67(4»). Market reviews are a consultativeprocess in which stakeholders will have an opportunity to submit comments onICASA's initial proposals.

1.2 The services considered in this review include: wholesale access to the fixedline local loop, fixed line narrowband exchange line, call origination and callconveyance services; and end-to-end leased lines and associated wholesalesegments services.

1.3 ICASA is mindful of the process underway within the Department ofCommunications to address policy to enable Local Loop Unbundling ("LLU").The market definitions contemplated in this review are not in conflict with LLUsince this is a regulatory remedy and not a market definition. Appropriatemarket definitions are in fact necessary and a pre-requisite for LLU policy to beeffective.

BRIEF SUMMARY OF FINDINGS

MARKET DEFINITION

1.4 A market for fixed line local loop access is defined. The market excludes fixedwireless service, wireless services and other wholesale fixed line services.

1.5 The following fixed line narrowband exchange line, call origination and callconveyance markets are defined.

1.5.1 Wholesale fixed line narrowband exchange line services for residentialcustomers;

1.5.2 Wholesale fixed line narrowband exchange line service for businesscustomers;

1.5.3 Wholesale fixed line call origination over narrowband networks;

1.5.4 Wholesale fixed line local conveyance services over narrowbandnetworks;

1.5.5 Wholesale fixed line trunk call conveyance services over narrowbandnetworks.

1 Section 67.4 of the ECA requires ICASA to define markets where it intends to impose pro-competitive regulations on licensees with SignificantMarket Power in cases where ineffective competition is found to exist


1.6 This following leased line markets are defined (and exclude fixed wireless orwireless services):

1.6.1 Low bandwidth (below 2Mbps) retail end-to-end leased lines fortransmission within South Africa.

1.6.1.1 Low bandwidth (below 2Mbps) wholesale symmetricbroadband originator ("S80") services;

1.6.2 High bandwidth (above 2Mbps) retail end-to-end leased lines fortransmission within South Africa

1.6.2.1 High bandwidth (above 2Mbps) wholesale S8a services;

1.6.3 Wholesale trunk services for transmission within South Africa;

1.6.4 International leased lines.

SIGNIFICANT MARKET POWER ("SMP")

1.7 Telkom is deemed to have SMP in all the above markets. Telkom currently hasa de facto monopoly controlling 100% of these markets, with the exception ofretail leased lines. However, even in this case they are likely to have well over45%, which is the required threshold for determining SMP. These SMPpositions are not anticipated to change in the life time of this review.

PRO·COMPETITIVE CONDITIONS

1.8 The following pro-competitive conditions are suggested:

1.9 An access obligation applicable to all markets:

1.9.1 Regarding wholesale local access services, Telkom must grant access,upon reasonable request, to the local loop at varying points and with theappropriate method of interconnection. This will include any co-locationfacilities which may be required in order to reduce the distance cost of makingconnection at various points, including co-location in the local exchange.

1.9.2 Regarding exchange services, call origination and call conveyance,Telkom must grant access, upon reasonable request, to all necessaryinterconnection facilities. Following international best practice, as well as theguidelines set out in the ECA, the access obligation will specifically include arequirement to provide wholesale services that enable Carrier Pre-selection("CPS") and Carrier Selection ("CS") (indirect access), as well as WholesaleLine Rental ('WLR"), which allows alternative providers to present thecustomer with a single bill for access plus calls and to decide how thecustomers call will be routed at a wholesale level.

STAATSKOERANT, 3 MEl 2007 NO.29863 7

1.9.3 Regarding leased lines, Telkom must grant access, upon reasonablerequest to end-to-end retail leased lines and end-to-end wholesale leasedlines and Partial Private Circuits ("PPCs") falling under the wholesale sse andtrunk markets.

1.10 That all such access be non-discriminatory, as required by the ECA

1.11 That Telkom be subject to transparency conditions with respect toprices and other key access information, as required by ECA.

1.12 That Cost of Accounting and separation of accounting conditions beimposed on Telkom with respect to all of the above access services.

1.12.1 That explicit cost-based pricing be imposed on all types of access at thelocal loop referred to above. The appropriate price control to be applied islikely to be long run incremental cost ("LRIC"), calculated on the basis ofrelevant forward looking economic costs of an efficient operator, including areasonable cost of capital.2 Where a LRIC determination will take too long,ICASA will issue immediate price caps based on other methodologiesincluding benchmarking, until such time as LRIC can be implemented. Notehowever, one exception:

1.12.2 Though LRIC will apply to retail end-to-end leased lines, as well as toPartial Private Circuits ("PPCs") falling under the wholesale sse and trunkmarkets, retail minus X regulation will be applicable to the wholesale end-toend leased lines.

2. METHODOLOGY

2.1 The approach the Authority proposes to adopt in the delineation of the relevantmarkets is that which is consistent with that utilised by the CompetitionCommission and the Competition Tribunal of South Africa ("The SA CompetitionAuthorities"). Furthermore, the Authority considers that the approach detailedwithin the Guidelines on market analysis and the assessment of significantmarket power under the regulatory framework for electronic communicationsnetworks and services by the European Commission ("EC") may be of someassistance. The conceptual framework adopted by the SA CompetitionAuthorities, the EC and the United States Department of Justice ("DoJ") and theFederal Trade Commission ("FTC") in defining relevant markets prescribes the"hypothetical monopolist tesf' which entails the evaluation of the likelycompetitive consequences emanating from a hypothetical profit-maximisingentity imposing a "small but significant non-transitory increase in price" test("SSNIP test").

2.2 The SSNIP test entails identifying the narrowest possible market, and considers

2''The adoption of LRIC as a regulatory costing technique is used widely for example by other national regulatory authorities (NRAs) in Europe. andby the FCC in the US. It has also been identified as the most appropriate methodology to use for setting interconnection charges by the EuropeanCommission in its 1998 Recommendation on Interconnection Recommendation 98f1951EC 8 January 199B)." Quoted from an OFCOM report on

mobile call termination. May 2003.


whether or not it would be profitable for a hypothetical profit maximising entity toimpose a small but significant, non-transitory increase in its price. Assumingthat consumers are likely to respond to such a price increase by consideringalternative substitutes offered by other entities, the analysis entails theidentification of such entities that would serve as competitive constraints to theunilateral increase in price by the hypothetical monopolist. If substitution isconsidered to be viable, such increase in price is likely to be unprofitable andconsequently the market boundary must be expanded to include suchconstraining entities offering substitute products.

2.3 The Authority is cognisant that the SSNIP test provides a conceptual frameworkfor conducting a market definition exercise. Furthermore, the Authority is alsocognisant that there exist numerous quantitative analytical tools which sustainthe conceptual framework of the SNNIP test. Such quantitative analysis includeamong other things: Critical Loss Analysis, Price Correlation Analysis, PriceElasticity Analysis and Diversion Ratio Analysis.

2.4 For supply-side substitution to be relevant for market definition it is commonlyconsidered that it must occur within a relatively short period of time (1 year)? Ifit is likely to occur only in the medium term (1 to 2 years), it is classified as "newentry" and is considered in the context of SMP.4 Supply side substitution whichis dependent on a new technology that is likely to become viable in 2 years ormore is not considered relevant to the market review.s As ICASA reviews willoccur on an ongoin~ basis these longer term affects can be considered insubsequent reviews.

2.5 Market definition will also take into account the existence of common pricingconstraints, such as where a firm cannot price one product differently fromanother even though they are not substitutes, as well as bundling, such aswhere two products are sold together in a bundled product.

2.6 This section will be divided into the following categories:

A. Wholesale access to the fixed line local loop;

B. Fixed line narrowband exchange line, call origination and callconveyance services, and

C. End-to end leased lines markets and wholesale segments.

3. MARKET DEFINITION

A. WHOLESALE ACCESS TO THE FIXED LINE LOCAL LOOP

3 See OFCOM, Mobile Call Termination, Review of Mobile Wholesale Voice Termination Markets: EU Market Review" ("The May Consultationj,

15 May 2003, page 32"Ibid5 OFCOM also consider the appropriate time frame for a forward looking analysis to be 2 years. A key reason for this is market reviews take place

over a similar time period. See OFCOM. "Review of Retail Leased Unes, Symmetric Broadband Origination, and Wholesale Trunk SegmentMarkets: Final Statement and Notification." 2004, page 206 Section 67(4)(e) of the ECA mandates that lCASA set out the schedule "in terms of which the Authority will undertake periodic review of themarkets and market segments"

STAATSKOERANT, 3 MEl 2007 No.29863 9

3.1 Wholesale local access will include various different combinations of facilitiesand various types of connection within the local exchange (e.g. before andafter OSLAM) and (physically speaking) just outside. The preciseinfrastructure, cables, equipment (including network terminating equipment onend user premises) used in wholesale local access services will be explicitlystipulated in the detailed regulation phase. In all cases, however, it will coverdedicated access to the copper (twisted pair) cables between the end userspremise and the local exchange. Enabling services such as power and colocation will also form a part of this market.

RETAIL MARKETS WHICH USE WHOLESALE LOCAL ACCESS AS AN INPUT

3.2 It is necessary to first consider the applicable retail markets in order toanalyse the competitive dynamics at the wholesale level. In South Africa, thereare three types of services for which the local loop is used:

3.2.1 fixed location access and narrowband only services (for basic voice,dial-up and ISDN);

3.2.2 dual fixed location services, which include access, narrowband andbroadband services, as is currently provided using ADSLtechnology; and

3.2.3 symmetric broadband services and leased lines.

3.3 At present, by far the majority of twisted pair copper cables are used foraccess and narrowband only services.

3.4 In order to supply these services, providers will have to purchase or selfsupply various levels of wholesale inputs, depending on the retail service.Some of these wholesale inputs are considered in later sections of this review(for example, call origination, call conveyance, symmetric broadbandorigination and leased line trunk services) and others are considered indifferent reviews (for example call termination, asymmetric broadbandorigination and broadband conveyance). For all the above retail serviceswholesale local access is required, which goes deepest into atelecommunications network. It is this segment which is considered in thissection. Ultimately, the demand for wholesale local access will be driven bythe demand for services in these downstream wholesale and retail markets.

3.5 In the retail narrowband services review, a distinction was drawn betweenmobile and fixed location access services, and between residential andbusiness services. In the asymmetric broadband review, a distinction wasdrawn between asymmetric broadband and narrowband internet (dial-up)services and symmetric (leased line) services. All markets have been definedas being national in geographic scope. The reasons for the relevant marketborders have been explained in the relevant reviews.


01. PLEASE COMMENT ON ICASA'S DEFINITION OF THE RETAIL MARKETSWHICH USE WHOLESALE LOCAL ACCESS AS AN INPUT?

PRODUCT MARKET FOR WHOLESALE LOCAL ACCESS

3.6 It follows from the retail market definitions referred to above that fixed linewholesale local access services are also a distinct market. The following setsout why this is the case, by considering fibre, fixed-wireless and mobiletechnologies as potential substitutes. The issue of a residential and businesssplit is also considered.

3.7 Fibre: Some local loop connections are partially made of fibre, particularly withrespect to the final connection to the user's premise (perhaps from the streetbox). However, these connections facilitate retail services with far greaterfunctionality, quality and speed than those that can be offered via pure coppercables. These connections are moreover generally significantly moreexpensive than copper based connections. Therefore, it is unlikely that fibrebased connections would constrain a hypothetical monopolist of wholesalelocal access from engaging in a SSNIP.

3.8 Fixed-wireless: There may be some potential for fixed-wireless technologysuch as WiMax to provide local loop connections which can compete withexisting wire based ones. There are examples of both asymmetric andsymmetric services. The key advantage of fixed-wireless connections is theirability to significantly reduce the cost of establishing these connections relativeto the sunk cost of wire based ones. Moreover, similar retail services can beoffered using this technology, including voice (over broadband) andbroadband.

3.9 Fixed wireless services are currently not proven, however, as only scatteredexamples of commercial roll out exlst." For symmetric broadband applications,speed and reliability are considered significantly lower. For asymmetricservices, there are doubts over the ability for fixed wireless services to providevoice services of comparable quality (delay and jitter characterise fixedwireless networks) which may seriously reduce the utility of a call (and localaccess is mainly used for voice services). It is also noted that the upfrontinvestment that end users have to make in radio receiving equipment isusually substantially more expensive than equivalent wire based services (butthis may yield an up-front/ongoing expense trade off).

3.10 Moreover, the potential providers of these services still face an incumbent whohas made deep investments in infrastructure over long periods of time, andwho has an established user base. Therefore, any entrant has to consider thefeasibility of making an adequate return at the post-entry price. The incumbentis likely to respond aggressively to any move in this direction, partly as a signalto deter further entry.

7 In South Africa. there are scattered examples of these services (notably, Uninet in Knysna) but current penetration is insignificant and nocompany has yet initiated a large scale commercial launch.


3.11 Overall, the ability for fixed-wireless providers to offer viable competition is notyet proven, even in international destinations, where incumbent providerscontinue to control the majority of local connections. Given this analysis, fixedwireless local loops are excluded from the market. It is noted that includingthem at this stage will not have any significant impact on SMP determinations.

3.12 Mobile local loops: Using cellular (2G and 3G) technology, mobile providerscurrently offer local loops which largely match (and stretch beyond) thecoverage of Telkom fixed link local loops. However, in the retail review ofnarrowband services, as well as the retail review of asymmetric broadbandservices, mobile services were separated out from fixed line services. Aprimary reason for this distinction is that mobile services (provided overcellular technology) are generally significantly more expensive, and offersignificantly increased functionality (mobility) relative to fixed line services.They are therefore unlikely to constrain a hypothetical monopolist of fixed lineservices to cost based prices. Therefore, a downstream wholesale purchaserof local access would not be able to purchase mobile local loop services forthe purposes of providing fixed location services (in a model similar to fixedwireless solutions) because this product would be too expensive relative to theinput costs of competitors. Moreover, retail switching (between fixed andmobile services) will not create a viable indirect constraint to a hypotheticalmonopolist of wholesale fixed location local access services, as these servicesfall into different markets.

3.13 Finally, it is not considered feasible that supply-side substitutability would beeffective in this context, due to the very high sunk costs and economies ofscale, scope and density of fixed location local loop provision.

3.14 Residential versus business: This review does not draw a distinctionbetween residential and business local loop connections. It is noted that thenarrowband retail review does draw a distinction between these two customergroups, and that many local loops may service a clear majority of residential orbusiness users (local loops are inherently "local"). However, the economicsbehind the wholesale provision of these services are not likely to besignificantly different, as differentiation between these groups occurs largely atthe retail level. Moreover, this distinction will have no significant impact onSMP finding at present, nor will it likely do so during the lifetime of this review.

02. DO YOU AGREE WITH ICASA'S DEFINITION OF THE PRODUCT MARKETFOR WHOLESALE LOCAL ACCESS?

GEOGRAPHIC MARKET FOR FIXED LOCATION WHOLESALE LOCAL ACCESS

3.15 At present, wholesale local access markets do not exist in South Africa and sopricing information is not available. Overall, Telkom generally sets pricing forits services on a national level. This "common pricing constraint" leads to ageneral finding of national based wholesale access markets, and this can beextended to the current case. It is noted that part of the reason for a nationalpricing policy on behalf of Telkom is due to Universal Service Obligations


(USO's). However, these obligations are not subject to change and thereforethey are not considered a relevant dynamic in the market for establishing exante regulation. Moreover, other prices of Telkom, which are not subject tousa conditions, such as wholesale prices, are also priced on a national basis.Finally, it would not currently make any difference to SMP determination ifalternative geographic slices had to be defined, nor is this likely to changeduring the lifetime of this review.

3.16 The following European regulators also defined a national market forwholesale local access: RTR (Austria); NITA (Denmark); ARCEP (France);BNetzA (Germany); ComReg (Ireland), AGCOM (Italy); NPT (Norway);ANACOM (Portugal); ANRC (Romania); PTS (Sweden); OPTA (TheNetherlands). Of the three regulators who did not define a national market,they defined large regional markets (OFCOM (UK); FICORA (Finland) andNCAH (Hungary).a

Q3. PLEASE COMMENT ON THE GEOGRAPHIC MARKET FOR FIXEDLOCATION WHOLESALE LOCAL ACCESS?

B. FIXED LINE NARROWBAND EXCHANGE LINE, CALL ORIGINATION ANDCALL CONVEYANCE SERVICES

THE RELEVANT RETAIL MARKETS

3.17 Demand for wholesale fixed line narrowband exchange line, call originationand call transit service is a derived demand from retail services. The relevantretail services include traditional voice services provided over fixed lines, dialup services (for Internet access) and other value added services (such as callwaiting and caller 10). The following markets are identified:

3.17.1 For business customers:

3.17.1.1

3.17.1.2

3.17.1.3

3.17.1.4

Traditional fixed location access services;

Local calls from traditional fixed locations, including CarrierSelection and Carrier Pre-Selection as well as Integrated VOIPofferings;

National calls from traditional fixed locations, including CarrierSelection and Carrier Pre-Selection;

International calls from traditional fixed locations, includingCarrier Selection and Carrier Pre-Selection; and

aA summary of EU requlatory decisions can be found in, ERG Work Programme, "Report on Experience with Market Definitions, Market Analysis

and Applied Remedies: Experiences Project," 15 July 2005.

STAATSKOERANT. 3 MEl 2007 No.29863 13

3.17.1.5 Fixed-to-mobile calls from traditional fixed locations, includingCarrier Selection and Carrier Pre-Selection.

3.17.2 For residential customers:

3.17.2.1 Traditional fixed location access services;

3.17.2.2 Local calls from traditional fixed locations, including CarrierSelection and Carrier Pre-Selection;

3.17.2.3 National calls from traditional fixed locations, including CarrierSelection and Carrier Pre-Selection;

3.17.2.4 International calls from traditional fixed locations, includingCarrier Selection and Carrier Pre-Selection; and

3.17.2.5 Fixed-to-mobile calls from traditional fixed locations, includingCarrier Selection and Carrier Pre-Selection.

Q4: PLEASE COMMENT ON THE DEFINITION OF THE RETAIL MARKETS INTHIS SECTION?

THE WHOLESALE MARKETS

DISTINCT MARKETS FOR EXCHANGE LINE, CALL ORIGINATION, LOCAL CALLCONVEYANCE AND TRUNK CONVEYANCE SERVICES

3.18 It is clear that exchange line services, call origination, local call conveyanceand trunk conveyance are not substitutes but rather complements in theproduction of a call. On the supply side, each service is associated withsignificant economies of scale and providers of anyone of these services willnot easily be able to build competing capacity for adjacent services inresponse to a SSNIP.

3.19 Furthermore, each of these services is characterised by significantly differenteconomies of scale. Although these scale economies are substantial, thefurther upstream into a fixed line network a new entrant chooses to selfsupply, the greater will be the economies of scale. Therefore, we can expectgreater competition on local and trunk call conveyance than will likely occur oncall origination and exchange line services. However, the extent to whichcompetition will be generated on call conveyance is as yet unproven.

3.20 The complementary segments of a retail fixed line narrowband service areneither demand side substitutes nor supply-side substitutes, and are thereforeconsidered to be in separate markets.


3.21 However, it is noted that at present, defining separate markets will not have asignificant impact on SMP determinations due to the overwhelming dominanceof the incumbent fixed line operator. For this reason, we do not consider itnecessary to define these markets any more finely. For example, we do not inthis review draw a distinction between ISDN and traditional voice exchangelines and between various levels of ISDN. It is not anticipated that significantlydifferent competitive dynamics will arise for these exchange line services inthe foreseeable future and there is thus limited utility in specifying separatemarkets. Note, this does not suggest that the same specific regulation will beapplicable to these services.

Q5: PLEASE COMMENT ON ICASA'S VIEW THAT EXCHANGE LINE SERVICES,CALL ORIGINATION, LOCAL CALL CONVEYANCE AND TRUNKCONVEYANCE ARE NOT SUBSTITUTES BUT ARE RATHERCOMPLEMENTARY SEGMENTS FOR THE TRANSMISSION OF A CALL?

BUSINESS AND RESIDENTIAL CUSTOMERS

3.22 Business and residential customers fall into different retail markets for bothaccess and outgoing calls. This is based on (a) the ability for providers to pricediscriminate, (b) the different quality of services that are provided and (c) thedifferent economies of scale required to service the business market asopposed to the residential market. The reader is referred to the retail reviewfor a more detailed discussion.

3.23 The finding that residential and business customers fall into separate retailaccess markets extends to the market for wholesale exchange lines. Businesscustomers generally have more advanced needs relative to residentialcustomers, and business services are generally associated with a pricepremium. This can be explained by (a) the enhanced services offered tobusiness and (b) due to an ability to discriminate easily between thesecustomer types. Because wholesale demand is derived from retail demand, asupplier of these services will not be able to switch from business to residentialwholesale local exchange line services. On the supply-side, business andresidential customers are generally located in different destinations and so aprovider to one customer type will face substantial investment costs in buildingout to the other customer type. Therefore, with respect to wholesale exchangeline services, given a lack of demand and supply-side substitutability, businessand residential customers are considered to fall into two separate markets.

3.24 At a retail level, discrimination between these customer types extends fromaccess into outgoing calls, through the use of different packages targeted andexclusively provided to each segment. Moreover, the supply side argumentmentioned above continues to hold here (call origination from a business cannot be substituted for call origination from a residential premise). However,there is no price or quality difference for wholesale origination according tocustomer type. Therefore a common-pricing constraint holds in this market. Atthe level of conveyance, calls from both residential and business customers


will be aggregated and transmitted over the same infrastructure. Therefore,call origination and call conveyance markets are not split between businessand residential users.

06: PLEASE COMMENT ON ICASA'S PRELIMINARY CONCLUSIONS THATBUSINESS AND RESIDENTIAL CUSTOMERS FALL INTO DIFFERENTMARKETS FOR BOTH ACCESS AND OUTGOING CALLS?

EXCLUDING MOBILE SERVICES

3.25 Mobile services are not in the same market as fixed line services at the retaillevel. The main reasons for this distinction are based on (1) functionaldifferences, especially the mobility advantage of mobile services and thebandwidth advantage of fixed services and (2) cost differences in that fixedline services are generally cheaper. This finding extends to the wholesalelevel. As demand for fixed location wholesale services is a derived demand,they cannot be substituted for wholesale mobile services which are an inputinto a different downstream market. Further, the high fixed cost of establishingfixed line services (exchange line, origination, local conveyance or trunkconveyance) render supply side substitution unlikely.

07: PLEASE COMMENT ON ICASA'S VIEW THAT MOBILE SERVICES ARE NOTIN THE SAME MARKET AS FIXED LINE SERVICES AT THE RETAILLEVEL?

EXCLUDING BROADBAND

3.26 Narrowband "dial-up" services, including ISDN, are not in the same market asbroadband services, at the retail or wholesale level. VOIP service such asvoice over ADSL, voice over leased line, or Internet based VOIP services(such as Skype) are not considered in the same retail market as fixed linevoice calls. Fixed wireless services are not in the same retail market asnarrowband voice services. The detailed market definitions are located in therelevant retail reviews.

3.27 All of these findings extend to the wholesale level.

08: PLEASE COMMENT ON ICASA'S VIEW THAT NARROWBAND SERVICESARE NOT IN THE SAME MARKET AS BROADBAND SERVICES AT THERETAIL LEVEL FOR THE PURPOSE OF ACCESS THE INTERNET?


C. END·TO·END LEASED LINES AND WHOLESALE SEGMENTS

3.28 The services considered in this section are for leased lines. This includes endto-end leased lines and the various wholesale segments that go into an end toend leased line service. Leased lines are used as inputs into downstreamservices such as leased line Internet Access, Virtual Private Networks (VPNs)and Disaster Recovery Services.

3.28.1 Leased line means a service that provides a defined transmissioncapacity between termination points in a communications network but doesnot include the routing of messages.

3.29 End-to-end leased lines are permanent connections that allow end users,such as companies to connect sites that are spread out (i.e. the sites are noncontiguous). These connections can be used to send voice and data from onesite to another. The type of data that can be carried includes customer details,prices or stock levels. For example a supermarket could use a network ofleased lines to transfer information between its stores and its centralwarehouse on inventory levels, accounts payable and prices.

3.30 A feature of leased lines is that they provide dedicated capacity," namely thatcapacity on leased lines is exclusively allocated to a particular end user. Thismeans that leased lines transfer data and voice at consistent speeds. Incontrast, when bandwidth is shared with a number of users (the bandwidth iscontested) as more users access the service the speed of transmission falls.

3.31 A further characteristic of retail end-to-end leased lines is that the underlyingcapacity is symmetric. This means that leased lines can carry data at asimilar rate in both directions between sites. For example symmetric capacitywould allow a retailer to transfer similar volumes of data from its stores to thewarehouse as from the warehouse to the stores. In contrast when capacity isasymmetric, larger volumes of data can be sent in one direction than in theother. An example of an application that requires asymmetric capacity isaccessing the World Wide Web where most of capacity is needed fordownloading data from websites rather than uploading information.

3.32 In light of these features of leased lines, this review defines a leased line as apermanently connected communications link between two premises dedicatedto the customers exclusive use where the capacity underlying thecommunications link is symmetric. The underlying infrastructure on whichleased line capacity is based may vary from line to line, and indeed on a singleline between different times (as the provider distributes data transmissionacross its core network to achieve maximum efficiency at any given point intime). For this reason, we define end-to-end leased lines in terms of thecapacity sold, as opposed to the technology or infrastructure used to providethat capacity.

9 OFTEL, Office of Telecommunications "Review of the retail leased lines, symmetric broadband origination and wholesale trunk segmentsmarkets", Published: 18 December 2003


3.33 At a wholesale level a distinction is drawn between the Symmetric BroadbandOrigination ("SBO") sections and the Trunk sections. As defined in this review,SBO services include both the terminating and backhaul segment, whereastrunk segments refer to transmission across the core network nodes. Considerthe diagram below.

Symmetric BroadbandOrigination

I~~ !terminating I4egment 1£ 1

BackhaulCore network

.................- - _ - .

. --_..__.- .

ITetmjnatin~ Backhaulsegment ~

i

Symmetric BroadbandOrigination

3.34 In the SBO section customers are connected to an appropriate point ofaggregation, referred to as a node. An example of a node would be the localexchange where leased lines from a number of companies' are aggregated sothat they can be connected to the rest of the network. Nodes can occur atdifferent levels of aggregation. For instance at a regional level a node wouldconnect a number of local exchanges which themselves are classified asnodes. The trunk section transmits data between nodes. For instance a trunksection would connect nodes in Johannesburg and Cape Town.

3.35 Currently, Telkom does not provide separate SBO or trunk segments products.That is, a customer (retail or wholesale) must purchase a complete end-to-endleased line service in order to lease capacity. This is in stark contrast to otherjurisdictions, such as the UK where regulatory intervention has mandated thatincumbent operators, such as BT, allow communication providers to purchasesegments of leased lines (known as Partial Private Circuits (PPC» which mayprovide only the trunk segment or only parts of the SBO segment. Forexample, a PPC may provide a connection from the end user's premises tothe local exchange, or some higher aggregated node, and an alternativecommunication provider may interconnect at this point, and use its owninfrastructure for the remaining parts of the leased line. Mandating access tothe incumbent's network, as the UK does, generates a number of efficiencies,which is an important recommendation coming out of this review. TheAuthority is cognisant of the current market dynamics regarding access to thevarious terminating segments of leased lines and is of the view that whilethere are currently no distinct markets (such as PPCs), this is a key access


mechanism for new entrants in future and as such is necessary to define thevarious possible segments of leased lines.

3.36 As stated in 3.35, Telkom does not provide separate SBO or trunk segmentsproducts at present. That is, a customer (retail or wholesale) must purchase acomplete end-to-end leased line service in order to lease capacity. Thismeans that in order for VANS to connect their POPs with an end user premise,they have to buy a retail (and more recently a wholesale) end-to-end leasedline. However, this is likely to be inefficient, as it does not take into account thefact that the VANS provider might service many end users and it is technicallyfeasible to aggregate these circuits (at the Telkom exchange to which theVANS POP is connected) into a higher bandwidth transport link. The VANSoperator is then responsible for de-aggregating (and re-aggregating for trunktransmission) the various individual circuits.

3.37 Partial Private Circuits (UPPC''): In order for entrants to gradually buildinfrastructure in response to growing demand from their customers, theyrequire that the incumbent complement and provide the missing portions ofthe entrant's infrastructure, as they climb the "investment ladder." Thesemissing portions are known as PPCs. The essential characteristic of a PPCservice is that it establishes a point of interconnection with an alternativeprovider which differs from the terminating segment of an end-to-end leasedline in, amongst others, the following two ways:

3.37.1 A PPC type product aggregates (and then the alternative providerdisaggregates) a series of individual circuits over a single higher bandwidthlink, called a transport link.

3.37.2 The transport link is usually offered over more transparent technologythan an ordinary leased line terminating segment. .

3.38 There are detailed descriptions of how PPCs work in the detailed regulation(and operator implementation manuals) of both OFCOM10 (and BT) andComReg11 (and Eircom), who are amongst the leading NRAs in developingregulation around leased line under the EU Telecommunicationdispensatlon." However, the following is noted:

3.39 The point of handover (POH) can occur at the customer site (Customer SiteHandover (CSH» or at an established point between the alternative operatorsPOP and the local exchange (or core network node) of the facilities providingoperator. In the latter, known as "In-Span handover", both operators build outto a common point, usually within a short distance of the facilities providingoperator's network node.

10 See for instance the consultation document by OFCOM (June 2004). "Partial Private Circuits Charge Control" as well as OFCOM's leased line

market reviews.II See for instance ComReg (2005) "Market Analysis: Retail Leased Lines and Wholesale Terminating and Trunk Segments of leased Lines

(National)12 See. for instance, the working document by the Commission of European Communities (June, 2002), "Public consultation on a draftCommission Recommendation On Relevant Product and Service Markets within the electronic communications sector susceptible to ex anteregulation in accordance with Directive 2002l21JEC of the European Parliament and of the Council on a common regulatory framework for

electronic communication networks and services 'Brussels"

STAATSKOERANT. 3 MEl 2007 NO.29863 19

3.40 A PPC will span the SBO portion, the trunk segment portion, or both, andthere will be varying combinations. A PPCs service will include the transportlink and any other associated equipment and services, and charges will bebased on covering these costs. But these charges will be independent of theamount of end users that the alternative operator chooses to pass through thattransport Iink.13 PPC services may include terminating segments, backhaulsegments and trunk seqments."

3.41 The barriers to entry in the SBO (origination) and Trunk section are different.In order to supply an SBO service, an electronic communications licenseeneeds to connect its customers to a local exchange (and then to higher levelsof aggregation). To do this cost effectively an entrant needs to connect manycustomers in the same area. In other words, it has to achieve economies ofdensity. This makes entry into SBO (origination) difficult with fixed linetechnology. In contrast it is easier to enter the Trunk section as a single line,say connecting Johannesburg to Cape Town, is able to aggregate a largenumber of users' demand (those users in Johannesburg and Cape Town). Asa result we consider that entry is more likely in the Trunk section than in theSBO (origination) section."

PRODUCT MARKET FOR LEASED LINES

3.42 This section considers the product markets for end-to-end leased lines. Theanalysis begins with retail end-to-end leased lines provided over traditionalfixed location infrastructure. The following issues are considered:

3.42.1 Bandwidth distinctions of various types of leased lines;

3.42.2 National trunk versus SBO portions

3.42.3 Symmetric versus asymmetric services;

3.42.4 Downstream services (including leased line Internet access and VirtualPrivate Networks);

3.42.5 New technologies that could provide the SBO portion: fixed wirelessalternatives and wireless local loops;

3.42.6 International leased lines.

13 Though jt willhave to be expanded as the number of customers increase, this is the responsibility of the alternative operator.14 A PPC may also provide capacity on the trunk segmentonly. For example,a providermay be able to bypass the incumbents local loop (andassociated terminating segments)but not find iteconomically feasible to build trunk capacity in all relevant directions.1lnstead of purchasinganend to end leased line for this purpose (betweenbase stations) they may utilise PPCs.The efficiency gain here is not necessarilyin the ability toaggregate individual circuits (whichthe alternativeoperator would do even with a end-to-Bodleased line) but because of the ability to bypassTelkom's terminatingsegmentand backhaul fees, as well as the benefit of more transparent (lower protocol) technology transmissioncapacity.15 Note that in Telkom's current retail leased offering, the distance dependentsegment is defined as being based on the radial distancebetweenthe "two end exchanges" for ATM and Megalineand between the "terminal multiplexsites" for Diginet services. There are also distant independentcharges (including port charges), which fall under the SSO portion as drawn above. However, under this pricing structure,the backhaul segment issubsumed within the distance dependent trunk segment.

20 No.29863 GOVERNMENT GAZETTE, 3 MAY 2007

Q9: PLEASE COMMENT ON ICASA'S DEFINITION OF THE RELEVANTPRODUCT MARKET FOR END TO END LEASED LINES

BANDWIDTH DISTINCTIONS OF VARIOUS TYPES OF LEASED LINES

3.43 Separate markets exist for retail leased lines of different bandwidths, Lowspeed leased lines (2Mbps and less bandwidth) are in a separate market tohigh speed leased lines (greater than 2Mbps bandwidth). The relatively highprice of low speed lines means that they cannot cost effectively substitute forhigh speed lines at current price levels, This same effect demonstrates thathigh speed lines are not constraining low speed line prices,

3.44 Table 1C below shows the cost of leasing a 2Mbps Diginet circuit and a34Mbps circuit over distances ranging from 1 kilometre to 1,000 kilometres. Itdemonstrates that the cost of purchasing multiple (16) 2Mbps leased lines isfar higher rate than the cost of purchasing a single 34Mbps line, Therefore, itis unlikely that a supplier of 2Mbps leased lines could constrain the price of34Mbps lines through a consumer purchasing multiple 2Mbps circuits.Similarly, given that a 34Mbps circuit is significantly cheaper than sixteen2Mbps circuits it is implausible that the prices of 2Mbps circuits areconstrained by the prices of 34Mbps circuits.

1 km 10 km 50 km 100 km 300 km 500 km 800 km 1000 kmDiginet

2048Mbos R7,619 R9,181 R16,121 R19,331 R28,OO3 R30,985 R33,166 R34,620The cost 01sixteen Diginet2048Mbps lines(i.e. the cost 01using 2048Mbpscircuits toreplicate thebandwidth 01a34Mbps circuit)" R121,902 R146,889 R257,941 R309,288 R448,046 R495,756 R530,652 R553,916

Silver 34Mbos R25,463 R43,931 R126011 R169,103 R290,621 R340,091 R382,493 R410,761

Table 1C: The price of purchasing one 34Mbps line cornparad to the cost of purchasing sixteen 2Mbps lines

3.45 A similar analysis was conducted to compare 34Mbps versus 144Mbps circuitsand 2Mbps circuits versus combinations of circuits with lower bandwidth.These analyses come to the same result - multiples of the lower bandwidthcircuits are not cost effective substitutes for higher bandwidth circuits.Nevertheless, there is limited practical relevance to defining further splits atdifferent bandwidth levels as the only distinction with relevance to the SMParguments is that between high and low speeds bandwidth,

3.46 We note that this analysis is provisional as it has been limited by necessity toanalysing the prices currently charged by Telkom. As these prices may beinflated this opens the possibility that the conclusion of this section (high andlow bandwidth lines are in different markets) may change if cost based priceswere used. However, at this stage, we have no reason to believe that ourconclusion will change in this manner. We note that the European Union has


placed high (more than 2Mbps bandwidth) and low speed (2Mbps bandwidthand below) lines in separate markets on the basis of cost-based prices.

THE TRUNK AND SBO SECTION OF THE LEASED LINE SERVICE

3.47 We note that the ssa and Trunk sections of the leased lines service are not inthe same market as the trunk section is a complement to the ssa sectionrather than a substitute.

010a: PLEASE COMMENT ON ICASA'S VIEW THAT SBO AND TRUNKSECTIONS OF THE LEASED LINE SERVICE ARE NOT IN THE SAMEMARKET?

010b: PLEASE COMMENT ON ICASA'S VIEWS REGARDING THE BANDWIDTHDISTINCTION AND SUCH A DISTINCTION SERVING TO SUSTAIN THEFURTHER SEGMENTATION OF THE PROPOSED RELEVANT MARKETDEFINITION FOR LEASED LINES?

END-TO-END LEASED LINES VERSUS OTHER SERVICES

3.48 This review now turns to the question of whether asymmetric broadband andother symmetric data services such as Virtual Private Networks (VPNs) are inthe same market as end-end leased lines. The finding of this section is thatneither asymmetric broadband nor VPNs are in the same market as retail endto-end leased lines.

ASYMMETRIC BROADBAND SERVICES

3.49 Asymmetric broadband services (ASS) are not considered a viable substituteto retail leased lines. There are various reasons for this, including:

3.49.1 Asymmetric services are usually contended, and are not associatedwith guaranteed speeds;

3.49.2 Asymmetric services do not provide the degree of flexibility offered byleased lines, in that certain applications/usages perform more poorlyover asymmetric services as currently provided through ADSL;

3.49.3 Leased lines typically offer transmission channels that are more securethan asymmetric services; and

3.49.4 Leased lines offer a relatively large amount of customer care, and areassociated with detailed and relatively easily enforceable Service LevelAgreements ("SLAs").

3.50 The fact that leased lines are symmetric, flexible and dedicated means thatthey offer an essentially different service to the shared and asymmetric ADSLservice. For this reason the two services are allocated into separate markets.

22 NO.29863 GOVERNMENT GAZETTE, 3 MAY 2007

3.51 The difference in the nature of these two services is reflected in the large pricedifferentials between the two. According to sales figures provided by MWEBsales staff16 for a Silver class17 128 Kbps leased line service the end user willpay R6, 633 (if they are within 5km of a MWeb exchange). For a Bronzeclass18 service, which is the bottom of the range service that providesinternational connectivity, a 128 Kbps line will cost R5, 383. By comparison anADSL 1024/4096 Kbps line costs R2,315 for 30Gigs and R695 for 3Gigs.Therefore even the low speed (128 Kbps) Diginet connection is far moreexpensive than the 1024 Kbps ADSL line. Given these large price differencesit is unlikely that leased line connections to the Internet are constraining theprice of retail ADSL services or vice versa.

DOWNSTREAM SYMMETRIC BROADBAND SERVICES

3.52 Virtual Private Networks ("VPN") and leased line Internet access provide acost effective means for many consumers to emulate the connectivity thatcompanies achieve with point-to-point leased line connections. This sectionconsiders whether either service is in a position to constrain the prices orquality of leased lines.

3.53 Leased line Internet access and end-to-end leased lines are not sufficientlyfunctionally equivalent to place the two in the same market. Internet servicesare inherently contended (on the Internet, not the access, portion) and sowhile they provide connectivity to overseas networks they offer substantiallylower functionality to the dedicated and guaranteed capacity offered on endto-end leased lines. Therefore a company connecting two premises togetherthrough the public Internet (via two leased lines to an ISP potnt-ot-presence("POP"») would not be able to generate the same guaranteed speed,transparency, security as occurs on end-to-end leased line services.

3.54 VPNs are created in a number of ways including the use of VANS providers'networks and by using the Internet. By sharing capacity with other users,either by using the Internet or the VANS providers' network the cost ofconnecting dispersed sites is reduced for end users. A VPN is "virtuallyprivate" in that the VANS provider ensures that each user's service is secureeven though the user does not have access to dedicated capacity.

3.55 As OFCOM notes for some consumers, VPNs are not substitutes for leasedlines as VPNs cannot replicate all of the following features of a leased lines:

3.55.1

3.55.2

dedicated transparent transmission capacity between twopoints;

guaranteed bandwidth, namely, the bandwidth is not contended,not shared with other users;

" By telephone, 27 September 200617 This is aimed at customers who require a fair blend of local and international bandwidth, offering 100C'ib local bandwidth access and 25%

guaranteed international bandwidth, with capability to burst to 100% of the line speed.

18 This is best suited to customers who access mainly local websites and web services, and very occasionally international content. It offers 100%

local bandwidth access and 12,5% guaranteed international bandwidth. with capability to burst to 100% of the line speed.

3.55.3


leased lines are transparent; and

No.29863 23

3.55.4 secure communication channel.

3.56 As VPNs cannot replicate all of these features of leased lines there are someconsumers for whom VPNs are not substitutable for leased lines. For theseconsumers these VPNs fall into a separate market to leased lines as customerby customer price discrimination is possible.

3.57 Technological advances mean that VPNS19 have become more useful andhave been adopted by many leased line end-users. However, the providers ofthese VPNs continue to use leased lines both in the access portion and in thetrunk segment portion. As a result VPN providers cannot substitute away fromleased lines in response to a 5%-10% increase in the price of leased lines.This means that these VPNs cannot constrain a hypothetical mon0fc0list ofleased lines. This places VPNS into a separate market to leased lines. 0

3.58 Leased lines are an input into VPNs, this combined with the existence ofconsumers for whom VPNs do not offer sufficient service levels and thepossibility (indeed the existence) of price discrimination mean that for the vastmajority of consumers VPNS do not provide a constraint on the prices ofleased lines.

011: PLEASE COMMENT ON ICASA'S VIEW THAT NEITHER ASYMMETRICBROADBAND NOR VPNS ARE IN THE SAME RELEVANT MARKET ASRETAIL END TO END LEASED LINES?

NEW TECHNOLOGIES: WIRELESS ALTERNATIVES TO SYMMETRICBROADBAND ORIGINATION BY LEASED LINES

3.59 It is possible that fixed wireless technology like WiMax and the wirelessservices offered by the mobile operators may be used to provide the local loopin any end-to-end connection or may be used as a substitute for a leased lineover short distances.

3.60 Fixed wireless services: Current indications are that the fixed-wirelessofferings such as those provided by Sentech and Uninet (in Knysna) are notable to replicate the guaranteed speed and reliability of symmetric leasedlines. Overall, the ability for fixed-wireless providers to offer viable competitionis not yet proven, even in international destinations, where incumbent

19 As ComReg have noted, "dedicated capacity can also be provided in other ways, where the management functions can be employed to allow

the customer the experience of a dedicated circuit without that being assigned exclusively and permanently to that customer for their use .... for

example, an IP network can be dimensioned such that there is capacity available to the IP platform to meet all customer requirements; howeverthe capacity used by a customer does not have to be specifically dedicated to that customer." ComReg, "Market Analysis: Retail leased lines andWholesale Terminating and Trunk Segments of Leased Lines (National)," document no 05103, January 2005.

20 We note that the same argument also applies to leased line internet access. As leased lines are an input into leased line internet access a userof leased line internet access cannot SUbstituteaway from leased lines in order to constrain a leased line monopolist from raising prices.


providers continue to control the majority of local connections. In South Africa,there are scattered examples of these services but current penetration isinsignificant. Therefore, we find that they are not in the same market as leasedlines. We note that these technologies are only now being introduced. Thismeans that they are currently only playing a limited role in the marketplace. Assuch, including these technologies in the market would not have a materialimpact on our conclusions for SMP.

3.61 Wireless services: The mobile operators now offer mobile data servicesbased on "3G" technology. However, these services are asymmetric whichmeans that they are not a demand-side substitute for symmetric leased lines.Currently, we are not aware of the mobile operators offering any dedicatedand symmetric services. However, were these services to become available, itis likely that they would be significantly more expensive relative to fixedlocation services, and issues of quality, reliability and security would remain.For these reasons, wireless data services are not considered demand-sidesubstitutes for leased lines.

Q12: WHAT ARE YOUR VIEWS ON THE IMPACT OF NEW TECHNOLOGIES?

INTERNATIONAL LEASED LINES

3.62 International capacity is used for a range of retail services includinginternational calls from fixed locations, international calls from mobiles,residential and business Internet connectivity (including VOIP services), andother general data transfer services for medium and large sized businesses.

INTERNATIONAL VERSUS NATIONAL LEASED LINES

3.63 It is clear that from a demand perspective, international leased lines are notsubstitutes for national leased lines. A business that wants to connect to apremise in an international jurisdiction cannot substitute this service for aconnection to local premises.

3.64 From a supply side, it is clear that additional international leased line capacitycannot be built within a year. Moreover, a supplier of international leased lineswill not easily enter the supply of national leased lines due to the substantialeconomies of scale involved in building a national network.

Q13: PLEASE COMMENT ON ICASA'S VIEW THAT INTERNATIONAL LEASEDLINES ARE NOT SUBSTITUTES FOR NATIONAL LEASED LINES?

SATELLITE VERSUS UNDERSEA CABLE

3.65 Currently, there are two ways in which voice and data communications fromSouth Africa can reach international destinations: through the SAT3/WASC/SAFE submarine cable ("SAT-3"), and through satellite technology.In general, though satellites are often used as a back-up, they do not presenta viable alternative to submarine cables. Satellites are generally more

STAATSKOERANT, 3 MEl 2007 NO.29863 25

expensive; have limited capacity and are associated with transmissioninterruptions which limits use to certain data appllcatlons.F' Therefore, we findthat international leased lines and satellite fall into separate markets. Thisplaces international leased lines in their own market.

Q14: PLEASE COMMENT ON ICASA'S VIEW THAT INTERNATIONAL LEASEDLINES AND SATELLITE FALL INTO SEPARATE MARKETS?

GEOGRAPHIC MARKET FOR ALL IDENTIFIED MARKETS

3.66 The markets for all identified leased lines are considered to be national inscope. At present, this finding would not impact on SMP determinations. In thefuture, different competitive conditions may develop in different areas, andbetween different areas, as alternative operators build competitioninfrastructure along specific routes. However, even at that stage, the sheercomplexity of defining localised markets may counter the regulatory benefitfrom so doing. Moreover, typically, nationally based common pricingconstraints may facilitate defining national markets. Developments in thisspace will be considered in the next review.

Q15: PLEASE COMMENT ON ICASA'S DEFINITION OF THE RELEVANTGEOGRAPHIC MARKET FOR ALL IDENTIFIED LEASED LINES?

21 ibid.


4. SIGNIFICANT MARKET

COMPETITIVENESS

POWER AND MARKET

ICASA DECLARATION ON SIGNIFICANT MARKET POWER ("SMP")

4.1 SMP is defined in the ECA as an instance where, in a given market, alicensee:

• is dominant;

• has control of essential facilities; or

• has a vertical relationship that the Authority determines could harmcompetition in the market or market segments applicable to theparticular category of licence.22

4.2 The ECA states that "dominant" has the same meaning as section 7 of theCompetition Act, which in turn implies that a firm is dominant in a market if:

• it has at least 45% of that market;

• it has at least 35%, but less than 45%, of that market, unless it canshow that it does not have market power; or

• it has less than 35% of that market, but has market power.

4.3 Telkom is currently the only active supplier in all the markets identified above,except perhaps retail leased lines, where alternative providers can resell anend-to-end leased line purchased from Telkom. However, given that this is arelatively new model, it is likely that Telkom has well over 45% in the marketfor retail leased lines, and is likely to have over 90%. In all other markets,Telkom has 100% of the market. Telkom therefore has SMP in all theidentified markets.

016: PLEASE COMMENT ON ICASA'S DECLARATION THAT TELKOM HASSMP IN ALL THE ABOVE MENTIONED RELEVANT MARKETS?

EFFECTIVENESS OF COMPETITION

4.4 The ECA only mandates the imposition of additional pro-competitive marketconditions in markets where ineffective competition appears to exist

22 Section 67.5 of the ECA


(S67(4».23 To determine the effectiveness of competition, we first consideredthe issues as made mandatory by the ECA for this analysis.I" This sectionexplores the effectiveness of competition and finds that the identified marketsdo not have the characteristics of effective competition.

4.5 Market shares and current competition: Telkom's overwhelming dominancein all the relevant markets means that consumers currently have littlealternative but to use Telkom's services. Even if fixed-wireless operators wereto be included in the market their low penetration rates, as well as lowcoverage, renders them unlikely to be able to constrain the price of therelevant services on Telkom's fixed line network.

4.6 Barriers to entry: The creation of fixed line local loop infrastructure (used forwholesale local access, call origination, call termination and SBO) isassociated with highly significant investment requirements. These includebuilding thoroughfare in the local environment which is suitable for wire ductsto be passed through, the wires themselves, street boxes, and localexchanges, including all relevant equipment.

4.7 Many of these costs are sunk, and cannot be recovered if an entrant decidesto exit. There are furthermore significant economies of scale, scope anddensity such that providers have to secure a sufficient customer base per areato justify the investment in street boxes, local exchanges and backhaulcircuits. For example, the wires of many users will utilise the same ducting,street box and capacity on the backhaul circuit.

4.8 Barriers to entry are lower for trunk segments (used trunk segments of leasedlines and trunk call conveyance) than for local loop infrastructure. While theentry of the SNO, the right to self-provision (by mobile operators), or moregeneral infrastructure rights (VANS) means that some regulatory barriers toentry have or may be removed, economic barriers to entry still remain high.Although the right to self-provide or lay infrastructure may enable theseoperators to pressure Telkom into lowering their wholesale prices, it will notensure that these prices will be lowered to competitive levels. Rather, Telkomwill be able to lower them only to the point where the "build or buy" decisionbalances in favour of buying.

23 Section 67.4 states:The Authority must prescribe regulationsdefining the relevant markets and market segments.as applicable, that procompetitive conditionsmaybe imposedupon licensees havingsignificantmarket power where the Authority detennines such marketsor marketsegmentshave ineffectivecompetiffDn."'(own emphasis)24 In this regard, ICASA is required to determine the effectivenessof competition in defined markets taking into account

non-transitoryentry barriers (structural, legal and regulatory) and other dynamic characteristicsmarket sharesforward looking assessment, over a "reasonableperiod,"Ofmarket power of each participant, taking into accountactualand potential existence of competitors,the level, trends of concentration, and history of collusion, in the market,the overall size Ofeach of the market participants,control of essential facilities,technologicaladvantages or superiority of a given market participant,the degree of countervailing power in the market,easy or privileged access to capital markets andfinancial resources,the dynamic characteristics of the market, includinggrowth, innovation, and products and services diversification,economiesof scale and scope,the nature and extent of vertical integration,the ease of entry into the market, including marketand regulatory barriers to entry.


4.9 Entry into the provision of international leased lines requires either Greenfieldinvestment in undersea cables or purchasing capacity and landing rights fromexisting consortiums. Greenfield investment is associated with highlysignificant economies of scale. An alternative is purchasing bandwidth fromexisting consortiums. However, Telkom is currently the only operator withaccess to South Africa's only undersea cable, SAT3, which means that otheroperators are effectively blocked from doing this.

4.10 Vertical linkages also increase entry barriers as they enhance Telkom'smarket power and their ability to defend against entry, including the potentialto bundle an array of different products (e.g. access and international calls)sourced further downstream. For example, their market power on wholesalelocal access services can be used to keep competitors out of trunk service by(a) denying trunk competitors access to wholesale local access services or (b)bundling retail access with local and national trunk calls such that the trunkcompetitor cannot compete. A similar argument exists for the relationshipbetween SMP in trunk markets relative to international markets.

4.11 Potential competition: Even with the licensing of Neotel, the mobileoperators (who can self-provide and resell spare capacity) and potentiallyother operators, it is doubtful that these potential entrants will be able toeffectively constrain Telkom to competitive levels. This finding is in keepingwith the experience of international jurisdictions, where stringent priceregulation has been implemented in order to facilitate entry. The introductionof LLU regulation, as required by this review, may help entrants into leasedlines or exchange line services share in the advantage of large economiesassociated with the local loop, and this in turn would help facilitate competitiondownstream. However, there is no evidence at present that this wouldgenerate sufficient downstream competition within the period of this review.

4.12 Countervailing power: Buyers of the products in the above mentionedrelevant markets will not wield countervailing power of any significance, atleast within the time scale of this review. Potential buyers will likely find itdifficult to develop sufficient economies of scale and economies of density tojustify building their own networks, and Telkom will be able to price above costwithout the risk of losing this demand. Furthermore, as Telkom will likelycontinue to play in the relevant downstream markets, they will have thepotential to margin squeeze on buyers of these wholesale markets so as toincrease concentration (and therefore prices) in the downstream market. Thisextends to the ability to frustrate or completely deny access.

Q17: PLEASE COMMENT ON THE EFFECTIVENESS OF COMPETITION INTHESE MARKETS?


5. PRO-COMPETITIVE CONDITIONS

BASIC REMEDIES

NO.29863 29

5,1 The wholesale services considered in this review are for facilities leasingand/or interconnection and the relevant sections in the ECA apply. The findingof SMP automatically implies that the regulatory principles as laid out in theECA cannot be set aside. This implies that the following four regulatoryremedies will apply to SMP operators, as appropriate:

i. obligation to provide access upon reasonable request by anotherlicensee or by a service provider operating under a license exemption(43(1), 44(3)(1) and (37(1»;

ii. obligation not to discriminate between the buyers of their calltermination services (43(7) and (37(6»;

iii. price transparency, which is achieved by the requirement forinterconnection agreements to be filed at ICASA, which the regulator canuse to provide copies of the agreement to any person (45(1-4) and 39(1)and 39(3».)

iv. In addition, ICASA is mandated to establish a framework in which thestructure of fees is determined (47).

PRICE CONTROLS AND ACCOUNTING SYSTEMS

5.2 The ECA also mandates that ICASA may set out further remedies which mayinclude but are not limited to:

v. price controls (67(7)(h) and 43(7»

vi. an obligation to maintain separate accounting systemlf5 using specifiedaccounting methods, which are available for inspection by the Authority(67(7)(f) and 67(7)(g) and 67(7)0»;

vii. obligations concerning matters relating to the recovery of costs and costorientation (67(7) (i».

5.3 The primary question that needs to be asked is whether the conditions (i) to(iv) are sufficient for limiting the negative impact of SMP in above mentionedrelevant markets or whether the additional controls (iv-vi) should !be imposed.

5.4 There are two main problems that arise from Telkom's SMP in the marketsidentified above:

5.4.1 The ability to increase prices: This negatively impacts on output andthe retail prices that end users face and is sufficient cause for regulatoryconcern and intervention.

25 For example, between matters relating to 1) access, 2) interconnection and 3) facilities leasing; the provision of 4) electronic communicationsnetwork services, 5) electronic commorncanons services or 6) any other service offered by the licensee applicable to the re,evant market or marketsegments at issue; and 7) retail and 8) wholesale prices;


5.4.2 Margin squeeze/ foreclosure: This potential abuse has two negativeconsequences. First, it can lead to increased concentration in the downstreamretail markets and this may allow all remaining participants to raise the price ofthe final retail service to higher than what it would have been in the presenceof more retail competition. Moreover, the elimination of alternative retail and/or intermediate suppliers would reduce the incentive for such (potential)providers to expand their infrastructure in order to take advantage of costbased wholesale services. In this regard, various European NRAs have notedthat competition has been slow in developing even in international jurisdictionswhere competition at the wholesale level has opened up (NPT (Norway),ANRC (Romania) and ANACOM (Portugal), RTR (Austria), AGCOM (Italy)).

5.5 The first issue can only be resolved through price regulation - accessrequirements, transparency and non-discrimination are alone insufficient toprevent Telkom from simply raising the price. Moreover, although the latterrequirements can help alleviate problems of margin squeeze and foreclosure,they cannot prevent Telkom from raising prices at the wholesale level (to itselfas well) whilst lowering them (or not raising them equivalently) at the retaillevel thereby effecting a margin squeeze. The basis for remedies is discussedin more detail below in reference to each of the broad service areas:

5.6 Wholesale local access market: The further into Telkom's network otherproviders are allowed access; the greater will be their ability to construct theirown product offerings. Wholesale local access services, which are providedthrough Local Loop Unbundling (LLU), are the deepest into the incumbent'snetwork that can be reached. The intention of regulating at this level is toresolve the problems around SMP which occur at this level of the network, aswell as to enhance competition downstream, which reduces the need toimpose strict regulations at retail levels. LLU regulation will also encourageinvestment in infrastructure up until the local loop, which facilitates facilitiesbased competition further downstream. Once economies of scale and densityhave developed to a sufficient degree, incumbents may even decide to buildtheir own local loops. It is noted that the full suite of remedies (including pricecontrol) were imposed by all European NRAs who had finalised their marketreviews in this area, except for SnetzA (Germany), who did not impose anaccounting separation obligation.26

5.7 SBO markets: It is likely that certain operators will build appropriateinfrastructure such that they are able to purchase SSO without needing to alsopurchase the trunk segment. However, unless Telkom is obligated to grantthese operators access to SSO at cost-base prices, Telkom will have anincentive to frustrate meaningful access either through non-price means or bycharging high prices. Moreover, no regulation further upstream will besufficient to eliminate this opportunity or incentive. For example, LLU will notbe economically viable for many operators who want to expand into leasedline offerings. Furthermore, operators that do purchase LLU will still requirecertain SSO products such as LLU backhaul.

26 A summaryof EU regulatorydecisions can be found in, ERG Work Programme,"Report on Experience with Market Definitions.Market Analysisand Applied Remedies: Experiences Project," 15 July 2005.


5.8 Trunk segments markets: If effective regulation at the SSO l!'lvel resulted inlarger scale build up of trunk segments, it may be possible to removeregulation at the trunk portion if that portion was found td be effectively

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competitive. However, it is highly unlikely that SSO regulation.will encouragesufficient infrastructure-based competition at the trunk level to justify this withinthe time scale of this review. Moreover, alternative operators may begin tooffer origination services through new fixed-wireless technologies, but will notyet have sufficient economies to build long distance trunk segments.Therefore, if only the SSO portion were subject to price regulation, Telkomwould still have an incentive to frustrate access or margin squeeze throughcharging.high prices for the trunk segment. For this reason, it is consideredappropriate for the trunk segment to be subject to price requlation,

5.9 Retail leased lines markets: We are cognisant that regulations appliedupstream will have an impact on downstream markets. Indeed, it is thepreference of ICASA to regulate at wholesale levels wherever possible. On theother hand, it is also apparent that providing upstream wholesale servicesrequires operators to build sufficient infrastructure of their own. Their ability todo this at present and in the near future to a sufficient degree to exert aconstraining impact on retail downstream markets, is not known. We suggestthat regulation at the wholesale level does not remove Telkorn SMP at theretail level. Therefore it remains necessary to impose retail regulation for bothlow and high bandwidth leased lines.27

•

5.10 Exchange line, call origination and call conveyance markets: Similararguments to those above hold for these intermediate service markets.Services markets further upstream - for example, wholesale local access are not expected to be taken up sufficiently so as to remove competitionconcerns downstream. Telkom has the incentive to both raise prices to makehigher profits as well as to exclude competition from the downstream retailvoice market, so long as it has a dominant position in these intermediateservice markets. .

5.11 It is further noted that ex ante regulation (as opposed to reliance oncompetition authorities ex post) is usually warranted when there is a marketfailure such that competition cannot develop (as opposed to abuse of marketpower in the presence of competition), where compliance I solutions arecomplex (e.g. require detailed regulatory accounts); where; monitoring isrequired and where legal certainty will enhance investment. We believe thatthese markets all satisfy these criteria. .

5.12 It will therefore be appropriate to impose conditions (i) through Nii) on Telkom.

Future products and services

27 It is also noted that these competition problems have the potential to impact on market beyond retail leased lines, such 'as InternetAccess andVirtual Private Networks. Firstly. it can lead to increased concentration in the downstream retail markets and this may aJlo~ all remainingparticipants to raise the price of the final retail service to higher than what it would have been in the presence of more retai'l competition. Moreover,the elimination of alternative retail and! or intermediate suppliers would reduce the incentive for such (potential) providers to expand theirinfrastructure in order to take advantage of cost based wholesale services.


5.13 It must be emphasised that any proposed pro-competitive conditions will applynot only to the specific products and services which currently exist, or whichare currently called leased lines, but with all potential products, which fallunder the above markets. For example, LLU operators often require what isknown as LLU backhaul, which consist of transmission capacity from a LLUoperator's co-location facility to one of their core network nodes. In this case,only the backhauls segment is provided (including associated equipment).28LLU backhaul clearly falls under the SBe portion, but may also include trunksegments as well. Radio base station backhaul services ("RBS") are leasedline links between mobile operator's base stations. These may also includeboth SBe and trunk segment portions.

5.14 New services may be made exempt from time to time from certain obligationsfor certain periods of time, if this was in the interest of generating increasedproduct diversification and investment.

Obligations on Telkom

5.15 If required, the specifics of pro-competitive conditions will be stipulated indetail following consultation with industry stakeholders and all interestedparties. However, the following provides an outline of the fundamentalproposals for pro-competitive conditions:

5.16 Telkom would be required to grant access in terms of the relevant clauses inthe ECA for any reasonable service or product falling under any of the marketsidentified above. ICASA will evaluate the reasonableness of any disputedrequest. In the interest of creating legal certainty and reducing regulatoryburden, certain products and services would be specifically directed as fallingunder the access obligations, as well as the other obligations discussedbelow:

5.16.1 For wholesale local access, the obligations cover local loops, at varyingpoints. These would include any co-location facilities that may berequired in order to reduce the distance of cost of making connection atvarious points, including co-location in the local exchange.

5.16.2 For exchange line, call origination and call conveyance services, theseobligations cover CP, CPS and WLR, as well as all interconnectionfacilities and services that are required to deliver these services.

5.16.3 For leased lines services, these obligations would cover products andservices under the SBe and trunk segments such as wholesale end-toend leased lines, PPCs, LLU backhaul and RBS, as well as anyreasonable requests for products and services, including moretransparent wholesale services (such as transmission capacity thatdoes not include ATM protocol). For PPCs, access must be madeavailable at a range of points and a range of bandwidth levels, as is

28 The LLU operators secure the terminating segment through LLU as opposed to regulation considered in this review (i.e.: terminating segments

of leased lines under SBO regulation) and builds/rents the infrastructure tor its own core network


reasonable. This obligation includes access to any associated facilitiesand equipment required for access (such those associated with In-Spanhandover and Customer Site Handover (UCSH"», and any co-locationfacilities (including co-location in the local exchange and core networknodes). A specific additional obligation would include Telkom landingfacilities for international leased lines. These would have to be madeavailable for other operators to access capacity on SAT 3, even if thiscapacity is not purchased from Telkom.

5.17 Telkom would be required to grant access in a non-discrimitlatory manner,as required by ECA

5.18 Telkom would be required to comply with transparency conditions regardingprices and other key access information, as required by the ECA. Theseconditions would include publication of reference offers, advance notificationperiods for changes to existing products and introduction of! new products(including price and other relevant terms) and publication of tachnlcal accessrequirements and procedures. .

5.19 COA/CAM and separation of accounting conditions would be imposed onTelkom with respect to all of the above mentioned services. Such systems arecritical for the regulator to enforce non-discriminatory and cost-based pricing.

5.20 Explicit cost-based pricing would be imposed on Telkom for; all the aboveservices. The appropriate price control to be applied, gi~en that largeeconomies of scale and scope characterise the industry, is long runincremental cost (ULRIC"), calculated on the basis of relevant forward lookingeconomic costs of an efficient operator, including a reasonable cost ofcapital.29 Note that this type of regulation is often implemented by EuropeanNRA's. For example, for wholesale local access, LRIC was used by thefollowing European NRAs: RTR (Austria); ComReg (Ireland); RTS (Portugal);OFCOM (UK) and NITA (Denmark). Where LRIC determinations will take toolong, ICASA will issue immediate price caps based on other methodologies

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including benchmarking, until such time as LRIC can be implemented. Note,however, one exception:

5.20.1 Though LRIC will apply to retail end-to-end leased linesl as well as toPartial Private Circuits (UPPCs") falling under the wholesale SSO and trunkmarkets, retail minus X regulation would be applied to wholesale end-to-endleased lines. As there is no retail equivalent of PPCs it will be necessary touse full LRIC price regulation for these products and services. With respect towholesale end-to-end leased lines, it is considered more appropriate to pricethese services on retail minus level. This is because! it would bedisproportionate and unnecessary to apply LRIC pricing regLJlation to bothretail and wholesale end-to-end leased line. The retail minus methodology,

2S"The adoption of LRIC as a regulatory costing technique is used widely for example by other NRAs in Europe, and by the FCC in the US. It has

also been identified as the most appropriate methodology to use for setting interconnection charges by the European Com!mission in its 199BRecommendation on Interconnection Recommendation 981195/EC 8 January 1998)." Quoted from an OFCOM report on n10bile call termination.

May 2003. I

34 NO.29863 GOVERNMENT GAZETTE, 3 MAY 2007

however, avoids the main problem (margin squeeze) that might occur givenretail regulation.

Q18: PLEASE COMMENT ON THE PROPOSED PRO COMPETITIVECONDITIONS TO BE IMPOSED ON TELKOM?

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